The postings of a customs lawyer in Chicago on the state of customs law and international trade law. Important Disclaimer: None of this is legal advice, don't act on it. Don't ascribe these statements to my law firm, its partners or clients. Don't steal from my blog. I wrote it, I own it. But, feel free to link to me. Also, under the rules regulating speech by attorneys, this blog may be construed as lawyer advertising. I am the sole party responsible for the content.

Tuesday, December 31, 2013

To all of you who read this blog, thank you. I am gratified to know that some of you in the trade community find enough useful and interesting information here to voluntarily give up your time to read my words. That means I am doing my job.

As always, I welcome comments and criticism. Also, when I am out and about, I am always happy to meet people who let me know that they read the blog. If you see me at an event, please introduce yourself. That's true no matter what role you play in the trade community.

Should you or your company have customs, trade, or export needs, please feel free to reach out to me and my partners at Barnes, Richardson & Colburn. We are happy to help.

All my best to all of you. I wish you a happy, healthy, and prosperous new year.

Sony Electronics, Inc. v. United States is about the tariff classification of a Sony camera that is capable of capturing still and moving digital images. Just to be clear about what we are discussing, it is the NSC-GC1.

Sony asked Customs for a ruling on the classification of these cameras in 2007. Customs and Border Protection responded that the cameras should be classified in 8525.80.50 as "television cameras, digital cameras, and video camera recorders." Sony wanted the cameras classified in 8528.80.40 as "digital still image video cameras."

The gist of this case is whether the phrase "digital still image video camera" refers only to cameras capable of recording still images or also includes cameras capable of recording moving images. Customs argued that the phrase refers to the technology used to capture images by electronic means rather than on film. Thus, this tariff item would cover cameras used to capture still (and only still) images by digital means in an electronic format.

Sony, on the other hand, argued that "video" means moving images. Thus, this tariff items covers cameras capable of making digital recordings of still or moving images.

The Court did a lot of analysis of the meaning of video at the time the HTSUS was updated to include this provision. There was some back and forth about how best to interpret the word. In the end (and I am giving this short shrift), the Court found that "video" means moving images. To get there, the Court relied on dictionary definitions both current and from as far back as 1996. Also, the Explanatory Notes use the term video in conjunction with television cameras, which clearly record or transmit moving images. As a result, the Court of International Trade held that "digital still image video cameras" covers cameras capable of recording both still and moving images.

I'm not 100% comfortable with that result. Off the top of my head, it strikes me that this can be resolved without looking beyond the phrase at issue. If this provision were intended to cover both still and moving image capturing cameras, shouldn't there be a word between image and video? It should say "digital still image and video cameras." As is, it looks to me like "digital still image" modifies "video cameras" in such as way as to make explicit that cameras in this heading are all designed to capture still images in a video format, meaning not on film. Otherwise, "still" loses its meaning. In other words, I tend to agree with Customs on this one. That, of course, is absent a minute of research or any opportunity to view the briefs. So, take it for what it is worth. I suppose the Federal Circuit will have an opportunity to sort it out. Clearly, I must be wrong because Sony won and, congratulations to it and its counsel on that.

This being the last day of 2013, I am trying to do some real and virtual desk cleaning. Part of that is making sure I have reviewed the relevant CIT cases for the year. It turns out I am behind by three. Here is a brief discussion of two of them:

This decision follows the entry of a default judgment against a customhouse broker who apparently misidentified entries of pesticides as animal fat and misidentified the importer of record. The broker also made unsupported claims for duty-free treatment under the NAFTA and other violations. Customs and Border Protection issued a prepenalty and penalty notice informing him of a $30,000 penalty to be assessed. Santos waived service but did not appear to defend the claims against him. The first round of this case was discussed here.

Given the facts presented in the unchallenged complaint, the Court of International Trade found that Santos violated a number of regulations enforced by Customs and Border Protection. Consequently, a penalty was appropriate. The Court stated that the violations were both numerous and qualitatively significant. Further, he had been warned previously with respect to some of the violations. Consequently, the Court found that the $30,000 penalty, which is the statutory maximum, was reasonable.

Shah Bros., Inc. v. United States
This is another case with some background. I first posted about it here. The underlying issue is the correct tariff classification of smokeless tobacco products from India known as gutkha. Customs and Border Protection initially classified it as snuff rather than as chewing tobacco. The importer challenged that classification in the Court of International Trade. The government has now agreed with the classification of the merchandise subject to the case and, therefore, has moved to "confess judgment." While that may sound good, the importer is annoyed because it actually wants a binding decision on the classification of the merchandise to prevent future litigation on the same point. Unfortunately, because Customs and Border Protection agreed with Shah Bros. in the case before the Court, there is no longer a "case or controversy" for the Court to resolve. Further, this is not a case where the plaintiff will not be able to secure relief in repeated entries. Rather, the importer got the relief it requested. consequently, the Court dismissed the case as now being moot.

Sunday, December 15, 2013

Welcome to the U.S. Court of International Trade, Judge Kelly. You get to start out with an odd case.

The issue here is the status of a ruling (N187601) issued to Best Key regarding the tariff classification of metalized yarn imported from China. In the ruling, Customs and Border Protection classified it in tariff item 5605.00.9000, which has a rate of duty of 13.2%. Subsequent to the ruling, Customs consulted trade publications and industry experts. Customs then determined that this merchandise did not come within the common and commercial meaning of the term metalized yarn. The reason for this was that although the yarn had been treated with metal powder, it contained only trace amounts of metals and did not exhibit a metallic look or feel. Consequently, in the April 24, 2013 Customs Bulletin, Customs and Border Protection proposed to revoke that ruling and reclassify the merchandise in 5402.47.90 as synthetic filament yarn, which has a duty of 8%. So, to keep things in perspective, understand that the plaintiff wants the revocation implemented.

Under 19 USC 1625(c), Customs must give the public at least 30 days to comment on the proposal. According to the Bulletin notice, that period ended May 20, 2013 (you do the math). Next, Customs and must publish a final decision within 30 days of the close of the comment period. That would have been about June 19, 2013. That final decision becomes effective 60 days after the date of publication, which would have been about August 18, 2013. Unless CBP doesn't do anything, which is what happened here.

As a result, 70 days after the close of the comment period, the plaintiff went to the Court of International Trade seeking an order forcing CBP to implement its decision. But, things are more complicated than they seem because the shutdown of the U.S. government caused some delays and Customs eventually did publish its decision in the October 2, 2013 issue of the Customs Bulletin.

That means the first question for the Court was whether the eventual publication made this whole affair moot. Looking at the complaint broadly, the Court determined that the issue before it was not just whether Customs eventually issued a decision. Rather, it was the broader question of whether Customs and Border Protection complied with the statutory requirements for publishing its revocation determination in a timely manner.

In this case, publication on October 2 was really only effective for those people who receive the Customs Bulletin by mail from private contractors. That is not "easy and continuing access," which is what the law requires to count as publication. The web version of the publication was not accessible until after the government restarted on October 17. As a result, the Court found that it would be inequitable to allow the government to rely on October 2 as the publication date and effectively shorten the notice period. Thus, the Court ordered that the notice period began to run on the 17th and that the notice will become effective 60 days thereafter.

So, the upshot is that the plaintiff wanted to force Customs to publish its notice and start the 60 day clock running no later than around August 18. But, because CBP eventually did get around to making the publication on October 2 and then the nastiness of the government shut down, the Court held that the publication was not really effective until October 17, meaning that the revocation does not become effective until December 16, 2013, which is even later than CBP expected.

UPDATE:

This case has been dismissed. This is sort of technical and does not have much to do with the actual tariff classification issue, so I will be brief. If you are interested in the details, read the opinion. The bottom line is that the plaintiff is a Chinese yarn company. According to plaintiff, the revocation of the subject ruling on the classification of a garment will harm it by creating a disincentive for apparel manufacturers to use its yarn on imported products. But, because the plaintiff is not an apparel importer, it is not in a position to challenge the ruling on the garment. To do so, it should import a garment and, if it disagrees with the liquidation, file a protest and challenge the garment classification in court. That, my friends, is what we call a decision on standing.

Saturday, December 14, 2013

Belimo Automation v. United States presents a old problem for many importers, at what point is an assembly that includes a motor something other than a motor. Usually, when presented with that questions, Customs and Border Protection will say "Not here." Also of not, this marks the first appearance in this blog of newly minted Judge Mark Barnett of the U.S. Court of International Trade. Because Judge Barnett comes from the Department of Commerce, I suspect we will be seeing quite a few customs decisions from him while he waits for his work product from Commerce to work its way through the court process.

Belimo imported an assembly used in heating, ventilation, and cooling (HVAC) systems. It consisted of a single electric motor, gears and two printed circuits. One of the printed circuits connects to and monitors the electric motor, which are used to open and close dampers to adjust the flow of air. As HVAC systems go, the pc board (which is known as an ASIC) is fairly sophisticated. It connects to and monitors the position of the motor and can calculate the position of the gears in the imported device. That corresponds to the position of the air damper. Based on data from the central controller, the ASIC calculates the desired damper position and signals the motor to act accordingly.

So, is the assembly a motor of HTSUS Heading 8501 or is it an automatic regulating and control device of Heading 9032?

To fit in 9032, the device must control the flow, level, pressure, or other variable in a liquid or gas or automatically control temperature, whether or not the operation depends on an electrical phenomenon that varies according to the factor to be controlled, and that are designed to bring that factor to and maintain it at a desired value.

The importer made an elaborate argument that the factor to be controlled is something other than the flow, level, pressure in a liquid or gas or temperature. If so, the fact that the assembly does not measure any variable of air flow, a liquid, or temperature would not prevent its classification in 9032. But, the Court disagreed and held that "the factor" is just a shorthand way of restating the variables listed above (i.e., something about airflow, liquids, or temperature). Given that these devices do not measure one of those variables and take some action to keep it in check, they are not properly classified in Heading 9032.

So, again, what about 8501?

The devices convert electrical energy into mechanical power to move the damper. According to the Court of International Trade, that makes them motors. The presence of the ASIC is not enough to change that result. According to the Court, motors stay motors even when equipped with additional components, absent limiting language or legislative intent. The Explanatory Notes go on to say that motors remain classifiable in 8501 even when equipped with pulleys, gear boxes, or flexible shafts so long as the principal function remains the same as a motor.

While the ASIC contributes additional functionality to the assembly, the Court of International Trade concluded that those additional functions are complementary to the function of the motor. As a result, the merchandise remains classifiable in 8501.

That's all well and good, but it only goes so far. This question comes up a lot and it is not always clear how to draw the line. Take a hand kitchen mixer, for example, it really is nothing more than a motor. The dive shaft connects directly to the attachments, which rotate to impart force to the cake batter or other inchoate baked goods. Nothing about that is in principal distinct from a motor, except that the mixer has a specific function and is clearly identified with a different name. There are a lot of assemblies that contain motors that are similarly dedicated to a specific task and have specific names. Electric razors and electric toothbrushes are in that category. Those are not motors because they are dedicated to a particular task, have a specific name, and are more specifically classified elsewhere in the tariff. At what point is a specialized assembly that contains a motor something other than a motor? I'm not sure I have a general answer. I do know that in any given case it requires detailed and creative thinking by both the importer and Customs to get it right.

Union Pacific Railroad has been fighting the good fight with U.S. Customs and Border Protection over whether it is liable for penalties for illegal drugs imported via railcars that were being used by unrelated Mexican railroad companies. UP's role was to forward the electronic manifest data to CBP and pick up the railcars after CBP clearance. Keep in mind that CBP does not accept electronic manifest transmissions from Mexican railroads. In an interesting opinion, the Eighth Circuit Court of Appeals has held that CBP lacks the authority to penalize UP for the actions of Mexican drug cartels on railcars UP neither owned nor controlled.

According to the opinion, UP has no railroad operations in Mexico and no control over the Mexican railroads involved. It has no ability to control employees of the Mexican railroads and no authority to secure or search trains inside Mexico. When a train arrives at the border, CBP inspects it and sends the Mexican locomotive and crew back to Mexico. When CBP releases the train, UP hooks up a locomotive and carries the railcars on to their destination.

UP has taken steps to prevent smuggling in its network. It has 200 police officers and 300 security contractors on that job. At the border crossings, UP spends $2.4 million per year on this effort. It also built facilities for CBP including inspection towers. UP is also a member of C-TPAT and other partnerships with law enforcement.

Despite that effort, it turns out that there have been illegal drugs in railcars carried by UP in the U.S. after entry from Mexico. As a result, and despite all those facts above, Customs and Border Protection has sought to impose a $38 million penalty on UP. The theory for the penalty collection is that UP failed to include the illegal drugs, which it did not load and did not know were present, on the electronic manifests. Included in the total of the penalties is $655,215 for drugs UP found after CBP inspected and released the railcar. UP notified Immigration and Customs Enforcement about the drugs, which CBP then decided to treat as a violation by UP.

For its part, during the administrative process, CBP reasonably agreed to mitigate the penalties by up to 95% if UP ensured that railcars were inspected in Mexico. UP apparently rejected this offer on the grounds that it is impossible for UP to comply due to the lack of security for its personnel. Keep in mind, these officers would be operating in Mexico actively interfering with the operation of drug cartels. If UP police were assigned that task, they would not be able to carry firearms, could not make arrests, and, if they seized drugs, would technically be liable for possession under Mexican law. The Mexican railroads actually rely on the Mexican military for inspections because police authorities have been ineffectual.

CBP makes the not unreasonable point that UP has a business relationship with the Mexican railroads and, therefore, some leverage. It appears that CBP wants UP to use that leverage to force the Mexican railroads to implement a CBP-approved training program for inspecting the railcars. Unless adequately inspected, UP would not take the railcars from the Mexican railroads. This truly sounds reasonable enough. But, when you remember that neither the local police authorities nor the Mexican military has succeeded in stopping the drug cartels, it seems to be too much to ask.

Customs position is based on 19 U.S.C. 1584(a)(2), which Customs says requires that common carriers exercise the highest degree of care and diligence in preventing drug smuggling in railcars. According to the Court, in 1988 Congress required that Customs pass a regulation defining the highest degree of care and diligence. To date, Customs has not done so.

This case was brought under the Administrative Procedure Act. As such, CBP's decision to impose the penalties will be upheld unless it was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. Similarly, the penalties will be set aside if Customs acted in excess of statutory authority or short of its statutory requirements.

At the start of its analysis, the Court asked whether the penalties are constitutionally suspect. The Court noted that by imposing a sever penalty on a morally innocent actor, Customs may have violated the fifth amendment's due process clause. Further, despite an apparent argument from Customs, this penalty is not permitted by the common law of civil forfeiture because the monetary penalty is not a forfeiture, the railcars were not misused by UP, and UP was not negligent. Thus, there is a question as to the constitutionality of Customs' interpretation of the law.

Where one interpretation of a statute indicates that it is unconstitutional and another indicates that it is constitutional, the Court will adopt the latter. Thus, the Eighth Circuit next looked at what Congress intended the statute to mean.

The Court noted that the law requires the "person in charge" of the vessel or vehicle to be responsible for properly reporting the cargo, including illegal drugs. CBP determined that UP was the person in charge because it electronically filed the manifests for the Mexican railroads. The Court, however, noted the other parts of the Tariff Act define the person in charge as someone on the vehicle or vessel such as a purser, master, pilot, or conductor. Under this meaning, UP was not in control of the trains when they entered the U.S. Further, although subject to some dispute, UP was not the owner of most of the railcars.

Further, the Court found that CBP's interpretation of the "highest degree of care and diligence" was not reasonable. On this point, the Court found no clear indication of congressional intent to "stretch constitutional limits." Accepting Customs' no-stone-unturned approach would require UP to accomplish what Mexican police and military authorities have failed to accomplish. This, the Court was unwilling to do.

Given the absence of the required regulatory definition, the Eighth Circuit applied the common law meaning of the phrase, which is the "normal, elevated standard of care expected of any common carrier." This is not the familiar reasonable care imposed on importers. Rather, it is the "utmost care and diligence." But, that should not be translated to mean all the care possible or conceivable. It requires "everything necessary to the security . . . and reasonably consistent with the business of the carrier, and the means of conveyance employed." Under this standard, the Court found that CBP was holding UP to an unreasonable standard of care. UP, according to the Court, has done everything reasonably consistent with its business and the means of conveyance (actually more) to prevent illegal drugs from entering the U.S. given that it is not in control of the railcars when they reach the U.S.

Consequently, the Court found no reason to accept Customs' interpretation of the statute, which would raise serious constitutional questions. Rather, it interpreted the statute to require reasonable efforts consistent with the utmost care of a common carrier. That makes the penalties unlawful.

That is a big win for UP, which might have taken the mitigation deal and walked away. Instead, this case illustrates, in a fairly narrow circumstance, that Customs penalty claims must be carefully considered in the context of whatever law is being enforced. If the subject of the claim had no control over the circumstances and no ability to mitigate the risk of a violation, that penalty may be suspect. That is a valuable reminder.